No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Eighteen: The “macro” view of the economy 458 surfboards. Let’s say that next year the price of burgers stays the same, but the price of surfboards increases to $700. In this case, the cost of the basket becomes $5400, which equates to a 3.8% inflation rate for that year ({$5400-$5200}/$5200 X 100). Of course the actual CPI-U calculation is much more robust with more items in the basket, but the principles are the same. There are many uses for price indices; the most common use is as a proxy for the cost of living. The CPI is not anyone’s actual cost of living, but it is representative of pricing trends that affect all of our household budgets to some degree. Many employers use it as a reference for worker’s pay; ideally they want to increase employees’ pay by at least the inflation rate so that employees are not actually taking a pay cut (in real purchasing power terms). Governments often use it to similarly adjust retirement benefits for government workers. The cost of a given good or service is often compared to the general inflation rate to indicate a problem (e.g., the increase in the cost of health care and college has significantly outpaced the CPI inflation rate for the last few decades). We can also use the CPI to compare dollar amounts across time. When Babe Ruth was paid $80,000 in 1931 for the New York Yankees, was he underpaid? Or is the minimum wage of 1960 higher or lower than today (in purchasing power terms)? These are questions that the CPI can help us answer. To help us understand why no one index is perfect, watch this video: Inflation is considered one of the two key macro variables for government policymakers. The other is unemployment, which we’ll consider in the next section. UNEMPLOYMENT You can arguably make the claim that we have macroeconomics as a science today because of the significant human suffering from high unemployment during the Great Depression. The human consequences are large (family stress, loss of income, etc.) and are reflective of what it means to be human—we were created to work. In the Garden of Eden, work was assigned to Adam before the fall, when everything was ultimately called “very good.” So when humans do not have the dignity of work, they are falling short of the flourishing that God intended. Yet this inherent goodness of work doesn’t necessarily correspond with a job. In economics, we are concerned not with whether The Real “Truth About the Economy:” Have Wages Stagnated?